Everything You Need to Know about Inflation and House Prices Before You Purchase Your New Home

Real estate is a booming business and investors keep falling over themselves to get a piece of the pie. Mortgage companies keep trying to entice prospective home buyers with competitive prices and facilities. But what is in it for the home buyer. How does he benefit from this boom himself? Will the value of the property continue to rise after he buys? Are there factors that will determine the value of his property? All these questions can be answered by a word: Inflation.

Inflation basically means prices are going up and this affects the price of houses too. It occurs in cycles. It can be stable or rising, depending on several economic factors especially demand and supply.

So how do home owners fare during inflation?

1. Home prices go way up

Home prices go up along with inflation. So the value of the property shoots up. So for the home owner this is a big plus as the value of his property has risen. He can increase his rent to reflect this reality or resell the house at a higher profit. It is a different ball game for the prospective home owner trying to take up a mortgage. Suddenly that property he has been eyeing shoots up and he has to pay more for the house.

2. Down payment increases

In going ahead to take the mortgage the 20-30% down payment he has to make for the mortgage increases.

3. Interest rates increase

Interest rate shoot up generally, so is the rate for the monthly mortgage repayment and might keep rising throughout the term. For an individual who has a fixed rate mortgage he might be insulated from this effect. So fixed rate mortgage is encouraged when inflation rates are expected to keep going up. However if inflation drops and interest rate follows, an individual on fixed rate might not benefit from the drop.

Conclusion

With increasing inflation the value of your property increases, so is the cost of maintaining the property. It is important to be able to weigh this and determine the right time to sell. It is not all bad news. There is always a threshold in inflation. As the prices keep shooting up, it gets to a point where buyers are discouraged and demand starts dropping, at this time, prices drop

Aidan has worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He has passed all 3 levels of the CFA exams. He now writes to share and learn more from the personal finance community.